Test bank chapter 14 audit of the sales and collection cycle PDF

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1Auditing and Assurance Services, 14e (Arens)Chapter 14 Audit of the Sales and Collection Cycle: Tests of Controls andSubstantive Tests of TransactionsLearning Objective 14- 1 Which of the following is not an account affected by the sales and collection cycle? A) Cash B) Accounts receivable C) Allow...

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Auditing and Assurance Services, 14e (Arens) Chapter 14 Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions Learning Objective 14-1 1) Which of the following is not an account affected by the sales and collection cycle? A) Cash B) Accounts receivable C) Allowance for doubtful accounts D) Sales of Accounts Receivables Answer: D Terms: Sales and collection cycle Diff: Easy Objective: LO 14-1 AACSB: Reflective thinking skills

2) The auditor's objectives for the sales and cash collections activities when the client is primarily an ecommerce business as compared to a "bricks and mortar" business are: A) unchanged. B) expanded. C) mitigated. D) decreased. Answer: A Terms: Auditor objectives for sales and cash collections Diff: Moderate Objective: LO 14-1 AACSB: Analytic skills

3) The overall objective in the audit of the sales and collection cycle is to evaluate whether the account balances affected by the cycle are fairly presented in accordance with Accounting standards. A) True B) False Answer: A Terms: Objective in audit of sales and collection cycle; Account balances fairly presented Diff: Easy Objective: LO 14-1 AACSB: Reflective thinking skills

4) The sales and collection cycle applies to businesses that transfer goods to customers or provides services to businesses. A) True B) False Answer: A Terms: Sales and collection cycle Diff: Moderate Objective: LO 14-1 AACSB: Reflective thinking skills

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Learning Objective 14-2 1) Which of the following is not one of the five classes of transactions included in the sales and collection cycle? A) Sales returns and allowances B) Write-off of uncollectible accounts C) Bad debt expense D) Interest Income Answer: D Terms: Class of transactions; Sales and collection cycle Diff: Easy Objective: LO 14-2 AACSB: Reflective thinking skills

2) What event initiates a transaction in the sales and collection cycle? A) receipt of cash B) delivery of product to a customer C) identification of a new customer D) customer request for goods Answer: D Terms: Initiates transaction in sales and collection cycle Diff: Easy Objective: LO 14-2 AACSB: Reflective thinking skills

3) A ________ is a document that indicates a request for merchandise by a customer. A) sales invoice B) vendor invoice C) customer order D) sales order Answer: C Terms: Document indicates request for merchandise Diff: Easy Objective: LO 14-2 AACSB: Reflective thinking skills

4) A ________ is a document that is matched with the customer order to assure that the correct quantity and type of goods are shipped. A) sales order B) customer order C) vendor invoice D) sales invoice Answer: A Terms: Document matched with customer order Diff: Easy Objective: LO 14-2 AACSB: Reflective thinking skills

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5) What critical event must take place before goods can be shipped in order to assure payment can be reasonably expected? A) determination of correct delivery address B) credit approval C) matching of shipping document with sales invoice D) receipt of sales order from the customer Answer: B Terms: Event must take place in order to assure payment Diff: Easy Objective: LO 14-2 AACSB: Reflective thinking skills

6) Before goods are shipped on account, a properly authorized person must: A) prepare the sales invoice. B) approve the journal entry. C) approve the customer's credit. D) verify that the unit price is accurate. Answer: C Terms: Goods shipped on account; Properly authorized person Diff: Easy Objective: LO 14-2 AACSB: Reflective thinking skills

7) A document prepared to initiate shipment of the goods sold by an independent shipper is the: A) sales order. B) bill of lading. C) sales invoice. D) customer order. Answer: B Terms: Document prepared to initiate shipment of goods Diff: Easy Objective: LO 14-2 AACSB: Reflective thinking skills

8) The document used to indicate to the customer the amount of a sale and payment due date is the: A) sales invoice. B) bill of lading. C) purchase order. D) sales order. Answer: A Terms: Document used to indicate amount of sale and payment due date Diff: Easy Objective: LO 14-2 AACSB: Reflective thinking skills

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9) In the sales and collection cycle when is, generally, the earliest point at which revenue can be recognized? A) sales approval B) credit approval C) cash collection D) shipment of goods Answer: D Terms: Sales and collection cycle; revenue recognized Diff: Easy Objective: LO 14-2 AACSB: Reflective thinking skills

10) Most companies recognize sales revenue when: A) sales are invoiced. B) goods are received by the customer. C) goods are shipped. D) Both B and C are correct, depending upon the company's revenue recognition policies. Answer: C Terms: Recognize sales revenue Diff: Easy Objective: LO 14-2 AACSB: Reflective thinking skills

11) Which of the following is not a business function within the "Sales" class of transactions? A) processing customer orders B) granting credit C) processing and recording sales returns and allowances D) shipping goods Answer: C Terms: Business function within the sales class of transactions Diff: Easy Objective: LO 14-2 AACSB: Reflective thinking skills

12) The total of the individual account balances in the accounts receivable subsidiary ledger should equal the: A) total sales for the period. B) balance of the sales account in the general ledger. C) total sales less the total cash received for the period. D) balance of the accounts receivable account in the general ledger. Answer: D Terms: Accounts receivable subsidiary ledger Diff: Easy Objective: LO 14-2 AACSB: Reflective thinking skills

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13) In the accounts receivable subsidiary ledger the length of time the account has been due can be useful to the client and the auditor in preparing the: A) trial balance. B) working trial balance. C) accounts receivable trial balance. D) aged accounts receivable trial balance. Answer: D Terms: Accounts receivable subsidiary ledger Diff: Easy Objective: LO 14-2 AACSB: Reflective thinking skills

14) A document sent to each customer showing his or her beginning accounts receivable balance and the amount and date of each sale, cash payment received, any debit or credit memo issued, and the ending balance is the: A) accounts receivable subsidiary ledger. B) monthly statement. C) remittance advice. D) sales invoice. Answer: B Terms: Document sent to customer showing beginning accounts receivable balance Diff: Easy Objective: LO 14-2 AACSB: Reflective thinking skills

15) The document that accompanies the customer's payment is the: A) credit memo. B) remittance advice. C) vendor invoice. D) monthly statement. Answer: B Terms: Document that accompanies customer's payment Diff: Easy Objective: LO 14-2 AACSB: Reflective thinking skills

16) The document that requires adjustments to the customers subsidiary ledger account is the: A) bill of lading. B) sales invoice. C) credit memo. D) monthly statement. Answer: C Terms: Document that requires adjustment to the customer's account Diff: Easy Objective: LO 14-2 AACSB: Reflective thinking skills

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17) A document that initiates shipment of goods and indicates the description of the merchandise, the quantity shipped, and customer name and address is the: A) bill of lading. B) sales invoice. C) picking ticket. D) vendor invoice. Answer: A Terms: Document that initiates shipment of goods Diff: Easy Objective: LO 14-2 AACSB: Reflective thinking skills

18) The ________ is a contract between a carrier (e.g., a trucking company) and the seller of goods that dictates the details surrounding the shipment of goods. A) bill of lading B) sales invoice C) picking ticket D) remittance advice Answer: A Terms: Contract that dictates details for shipment of goods Diff: Easy Objective: LO 14-2 AACSB: Reflective thinking skills

19) Some companies have customers send payments directly to a post office box address maintained by a bank. This is called a(n) ________ system. A) direct deposit B) funds transfer C) lockbox D) interbank transfer Answer: C Terms: Payments sent to post office box Diff: Easy Objective: LO 14-2 AACSB: Reflective thinking skills

20) In designing audit procedures for the sales returns and allowances account, the auditor would primarily rely on the following accounts, except for: A) sales returns and allowances transaction file. B) accounts receivable master file. C) cash receipts journal. D) sales returns and allowances will be recorded in all of the above. Answer: C Terms: Designing audit procedures sales returns and allowances Diff: Moderate Objective: LO 14-2 AACSB: Reflective thinking skills

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21) For a firm that practices good internal controls in the sales and collections cycle, the function of indicating credit approval should be recorded on which of the following documents? A) sales order B) sales invoice C) customer order D) remittance advice Answer: A Terms: Good internal controls in sales and collection cycle; Credit approval Diff: Moderate Objective: LO 14-2 AACSB: Reflective thinking skills

22) When posting items from the sales journal, details of the journal and journal totals are posted to which items? A) Details of the journal are posted to Journal totals are posted to The sales account The general ledger B) Details of the journal are posted to The sales account

Journal totals are posted to The accounts receivable subsidiary ledger

Details of the journal are posted to The accounts receivable master file

Journal totals are posted to The general ledger

Details of the journal are posted to The accounts receivable account in the general ledger

Journal totals are posted to

C)

D) The sales account in the general ledger

Answer: C Terms: Posting from sales journal; Details of journal and journal totals posted Diff: Moderate Objective: LO 14-2 AACSB: Reflective thinking skills

23) Credit memos are normally issued for what purpose(s)? A) To adjust the customers balance to the amount owed to the company. B) To assist in the aging of accounts receivable. C) To reduce customer frustration and sales losses. D) To inform the customer of the balance due. Answer: A Terms: Credit memos Diff: Moderate Objective: LO 14-2 AACSB: Reflective thinking skills

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24) Who is generally responsible for opening receipts when a company uses a lockbox to speed the handling of cash receipts? A) company personnel B) temporary employees in the town where the lockbox is located C) bank employees D) company controller Answer: C Terms: Opening receipts; Lockbox Diff: Moderate Objective: LO 14-2 AACSB: Reflective thinking skills

25) One key internal control to prevent fictitious transactions in the sales and collection cycle is: A) assign a specific customer number for each customer in the computer files. B) to account for the integrity of the numerical sequence of sales orders. C) to include the sales price list of all products in the computer files. D) having bank reconciliations prepared by one who is independent of the treasury function. Answer: A Terms: Internal control; Fictitious transactions in sales and collection cycle Diff: Moderate Objective: LO 14-2 AACSB: Reflective thinking skills

26) Which of the following is the appropriate point at which the auditor deems authorization to be critical? A) Credit granting Price authorization Shipment of goods Yes Yes Yes B) Credit granting Yes

Price authorization No

Shipment of goods Yes

Credit granting No

Price authorization Yes

Shipment of goods No

Credit granting Yes

Price authorization No

Shipment of goods No

C)

D)

Answer: A Terms: Point authorization deemed critical Diff: Moderate Objective: LO 14-2 AACSB: Reflective thinking skills

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27) Sales should be recorded, at the earliest, when: A) the order is received. B) the order is received and credit is approved. C) credit is approved and it is verified that there is enough inventory to fill the order. D) the shipment takes place. Answer: D Terms: Sales recorded Diff: Moderate Objective: LO 14-2 AACSB: Reflective thinking skills

28) Which of the following would least concern an auditor regarding the lack of a specific authorization to conduct the sales transaction? A) granting of credit B) shipment of goods C) determination of discounts D) selling of goods for cash Answer: D Terms: Specific authorization to conduct sales transactions Diff: Moderate Objective: LO 14-2 AACSB: Reflective thinking skills

29) Smith Manufacturing Company's accounts receivable clerk has a friend who is also a Smith's customer. The accounts receivable clerk has issued fictitious credit memos to his friend for goods supposedly returned. The most effective procedure for preventing this activity is to: A) prenumber and account for all credit memorandums. B) require receiving reports that provide evidence of returned inventory items to support all credit memorandums before they are approved. C) have independent sales and accounts receivable departments. D) mail monthly statements to customers. Answer: B Terms: Fictitious credit memos; Procedure to prevent activity Diff: Moderate Objective: LO 14-2 AACSB: Analytic skills

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30) Explain each of the following types of documents and indicate the class of transactions in which they are commonly used. 1. Customer order 2. Shipping document 3. Remittance advice 4. Sales returns and allowance journal 5. Uncollectible account authorization form Answer: 1. Customer order request for merchandise by a customer. Appears in the Sales class of transactions. 2. Shipping document document prepared to initiate shipment of goods, indicating the description of the merchandise, the quantity shipped, and other relevant data. Appears in the Sales class of transactions. 3. Remittance advice document that is mailed to the customer and typically returned to the seller with payment. Appears in the Cash receipts class of transactions. 4. Sales returns and allowance journal journal used to record all sales returns and allowances. It performs the same function as the sales journal. Appears in the Sales returns and allowance class of transactions. 5. Uncollectible account authorization form document used internally to indicate authority to write off an account receivable. Appears in the charge off of Uncollectible accounts class of transactions. Terms: Documents and class of transactions Diff: Easy Objective: LO 14-2 AACSB: Reflective thinking skills

31) You are an audit manager for Rodgers & Co. and have recently taken on as a client Manufacturing Company. You are in the initial stages of planning the audit and have decided to start gathering information about the Sales/Collection Cycle of the business. List below the classes of transactions that you need to gather audit evidence for in designing your audit procedures. Answer: The five classes of transactions that comprise the sales and collection cycle are: • Sales (cash and sales on account) • Cash receipts • Sales returns and allowances • Write-off of uncollectible accounts • Bad debt expense Terms: Classes of transactions that comprise the sales and collection cycle Diff: Moderate Objective: LO 14-2 AACSB: Reflective thinking skills

32) Customer billing is a critical process which auditors must understand. What are the most important aspects of billing and what are the related objectives? Answer: The most important aspects of billing are: • To make sure that all shipments made have been billed (completeness), • That no shipment has been billed more than once (occurrence), and • That each shipment is billed for the proper amount (accuracy). Terms: Aspects of billing and related objectives Diff: Moderate Objective: LO 14-2 AACSB: Reflective thinking skills

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33) Discuss the four business functions that result in sales transactions in a typical sales and collection cycle and, for each function, state the key documents and records involved. Answer: The four business functions that result in sales transactions, and related documents and records, are: • Processing customer orders. Key documents include customer order and sales order. • Granting credit. Customer order or sales order. • Shipping goods. Shipping document (bill of lading). • Billing customers and recording sales. Sales invoice, sales journal, summary sales report, accounts receivable master file, accounts receivable trial balance, and monthly statements. Terms: Business functions that result in sales transactions; Sales and collection cycle; Documents Diff: Challenging Objective: LO 14-2 AACSB: Analytic skills

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34) Match seven of the terms for documents and records (a-k) with the descriptions provided below (1-7): a. b. c. d. e. f. g. h. i. j. k.

Customer order form Sales order Bill of lading Sales invoice Summary sales report Accounts receivable master file Monthly statement Remittance advice Prelisting of cash receipts Credit memo Uncollectible account authorization form

________ 1. A list prepared when cash is received by someone who has no responsibility for recording sales, accounts receivable, or cash, and has no access to the accounting records. It is used to verify whether cash received was recorded and deposited at the correct amounts and on a timely basis. ________ 2. A document indicating a reduction in the amount due from a customer because of returned goods or an allowance. ________ 3. A document prepared to initiate shipment of goods, indicating the description of the merchandise, the quantity shipped, and other relevant data. It is a written contract between the carrier and seller of the receipt and shipment of goods. ________ 4. A document for communicating the description, quantity, and related information for goods ordered by a customer. This is frequently used to indicate credit approval and authorization for shipment. ________ 5. A document mailed to the customer and typically returned to the seller with the cash payment. ________ 6. A document used internally to indicate authority to write -off an account receivable as uncollectible. ________ 7. A document or electronic record indicating the description and quantity of goods sold, the price, freight charges, insurance, terms, and other relevant data.

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Answer: 1. i 2. j 3. c 4. b 5. h 6. k 7. d Terms: Documents and records Diff: Moderate Objective: LO 14-2 AACSB: Reflective thinking skills

35) A sales invoice is a document that usually indicates credit approval. A) True B) False Answer: B Terms: Sales invoice; Credit approval Diff: Easy Objective: LO 14-2 AACSB: Reflective thinking skills

36) Credit should be approved before a customer's order is received. A) True B) False Answer: B Terms: Credit approved Diff: Easy Objective: LO 14-2 AACSB: Reflective thinking skills

37) Credit should be approved before goods are shipped to a customer. A) Tru...